Will Congress's economic stimulus package include provisions for raising the limits on Fannie Mae and Freddie Mac conforming mortgages? The topic has dominated news talk stations for several weeks. Now, it appears that conforming loan limits will be increased in the effort to invigorate housing markets and make financing homes easier. What can borrowers expect from mortgage lenders given this new mortgage landscape?

Who Are Fannie Mae and Freddie Mac Anyway?

These bodies are the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). They are not government agencies, and the loans they buy and sell are not government backed. The two corporations are government sponsored enterprises or entities (GSEs), and they were created to make home ownership easier in America by buying loans from mortgage lenders and selling them to investors. This frees up the lenders' cash and allows them to underwrite even more loans--so more families can buy houses.

What Is a "Conforming" Loan?

"Conforming" loans are those that conform to Fannie Mae and Freddie Mac guidelines. One of these guidelines dictates the loan amount. Recently the maximum loan amount was $417,000. Mortgages exceeding that loan amount could not be sold to Fannie or Freddie, so lenders charged higher rates for these larger loans to compensate for the added risk and difficulty selling them 

How Does the Higher Limit Help?

When lenders can easily sell former "jumbo" loans as conforming loans, they can charge less to make them. The difference between jumbo mortgage loan rates and conforming rates typically ranges from .5% to 1.5%. So, for example, subtracting an extra 1% from the interest rate on a $600,000 mortgage subtracts $386 from the monthly payment. Those who can benefit from this change should be motivated to refinance or buy homes while they can take advantage of the increase in conforming loan amounts.

New Conforming Home Mortgage Limits: How High Will They Jump?

In an effort to encourage home buying, Congress has raised the conforming loan limit to amounts of up to $729,750 in some places. The amount depends on housing prices in the area and is set at 125% of the median price in each market or $417,000, whichever is greater. For example, San Francisco and 19 other metropolitan areas will get increases; the other 140 areas will not.

For Limited Time Only: Home Buyers Will Have to Move Fast

The bill as drafted allows this increase only until the end of 2008. The idea is that by making it easier to finance and buy homes, the bill will get additional buyers into the market and dry up the surplus of homes, stabilizing prices and strengthening the economy. This purpose is better served by getting potential buyers off the fence now with a limited-time-only offer.

Other Mortgage Options for Home Buying or Refinancing

Government loans might be available to help buyers get into more expensive homes. A bill in the House of Representatives could raise FHA limits as high as $829,750 in some areas. And VA loans already feature a limit of up to 1 million dollars. Other jumbo loan options include hybrid ARMs, which carry significantly lower rates than 30 year jumbo mortgages and can feature rates fixed for 3, 5, or 7 years.

Mortgage lending options and loan amounts are undergoing major changes as markets and government respond to today's challenges. Those buying or refinancing homes are smart to explore all options with a trusted lender and determine if a fast move is the right move.

Sources:

Business Week

Fannie Mae

Freddie Mac

Seattle Post-Intelligencer

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